Pulp Friction

By Bas van Geffen, Senior Macro Strategist at Rabobank

Vincent: “That’s a pretty f***ing good milkshake. I don’t know if it’s worth five dollars but it’s pretty f***ing good.”

The days of $5 milkshakes are long gone, and the tale of inflation present only seems to be broadening. The CEO of Suzano, the leading producer of pulp, warned that “inventories have been gradually declining until they can reach a disruption point, a lack of pulp,” as the war in Ukraine disrupts the export of Russian wood to European pulp producers. As Bloomberg’s headline ran, this raises the risk of higher prices for toilet paper, but also tissues, diapers and packaging.

Those who hoarded a lifetime supply of toilet paper during the 2020 pandemic may feel a sense of vindication, but most households would again feel the pinch of a price hike in these essential goods, after higher energy bills and food are already affecting purchasing power. – We have been covering the impact of the terrible events in Ukraine on the global economy through scenario analyses. Journalists are risking their lives to show the world the scale of the humanitarian crisis. But you know the situation must truly be dire if U2’s Bono flies to a country for a surprise gig.

Vincent: “How many up there?”

Jules: “Three or four.”

Vincent: “That’s countin’ our guy?”

Jules: “Not sure.”

Vincent: “So that means there could be up to five guys up there?”

Jules: “It’s possible.”

Vincent: “We should have f***in shotguns.”

And the situation isn’t getting much better. Ukraine continues to resist, with help from the West. Germany will provide Ukraine with heavy artillery and tanks. This will be the first time in post-WWII history that the country sends weapons to a warzone. Nonetheless, Germany’s U-turn has not been smooth sailing. High ranking military officials have protested the move, out of concern that it would leave Germany’s army with insufficient material. Ukraine meanwhile has complained about the lack of timely support. And German voters agree: Scholz’ SPD suffered quite a defeat in the regional elections of Schleswig-Holstein, and polls see the party losing momentum as well. “No more war. No more genocide. No more tyranny,” Chancellor Scholz said in a speech to remember the end of WWII, adding “we support Ukraine in the fight against the aggressor. Not doing so would mean capitulating to sheer violence.”

Today Russia celebrates Victory Day, which I suppose will have to do without a U2 concert. The commemorative event will however include a military parade and an address by President Putin. The world will be listening. As the Russians prepared for today with dress rehearsals the West is speculating what Putin will tell the nation, with some suggesting that he will escalate the conflict by rebranding his ‘special military operation’ a war and mobilising the population. The pressure is certainly on. The Ukrainian resistance has thwarted Putin’s hopes of a quick victory and the G7 has agreed to ban Russian oil – even if the EU’s plans to do so are still being held hostage by Hungary’s Orban. Let’s just hope Putin did not pick U2’s “How to Dismantle an Atomic Bomb” as the theme music for today’s events.

Quick side-note for those who want to escape being drafted into service: you could try your luck at forming a popular K-Pop group.

Butch: “You okay?”

Marsellus: “Naw man. I’m pretty f***in’ far from okay.”

Butch: “What now between me and you?”

Marsellus: “I tell you what now between me and you. There is no me and you. Not no more.”

The theme of decoupling remains a broader trend. That is not just Russia being isolated, but also China increasingly choosing to sever ties with the West. The Chinese government is banning the use of all foreign PCs, while also only allowing the use of a Chinese-made operating system. Meanwhile China’s independent refiners (but also India) continue to buy Russian oil against steep discounts, which opens the risk of second-round sanctions by the West. Even without sanctions, there are already concerns about the Chinese economy. The doubling down on its zero-Covid is bad news for the country’s production. Just look at the recent PMIs for a rough indication!

Lance: “You’re going to give her an injection of adrenaline directly to her heart.”

Indeed, Chinese Premier Li Keqiang warned of a “complicated and grave” employment situation, ordering national and local governments to implement measures that safeguard jobs and help companies withstand the impact of a new round of lockdowns and to maintain their production while adhering to the new measures: “Stabilising employment matters to people’s livelihoods. It’s also a key support for the economy to operate within a reasonable range”.

Our China analyst isn’t convinced that this can be achieved as easily, though. That may also see the PBOC adding new stimulus measures to soften the blow. However, the global fall out of a slowing China shouldn’t be overlooked either. Yet, other central banks have made it clear that their priority is now inflation, not growth. The market has been second-guessing their interpretation of Fed Chair Powell’s remarks last week, and in Europe calls for a July rate hike are increasing.

Lance: “This ain’t Amsterdam, Vince. This is a seller’s market.”

All in all, this makes for a pretty grim outlook. We have been flagging the risks that central banks are hiking into the next recession (see here, and here, for example). And if you don’t believe us, Bill Gates does think that the bears “have a pretty strong argument”. Of course, he may have had a bad day after losing all those potential Windows sales in China.

However, even though central bank policy is no longer conducive to asset prices, reversing back into stimulus-mode may not prevent a slowdown either. Indeed, this all comes back to the argument my colleague Mike Every has put forward in this daily regularly: today’s economic risks aren’t so much about demand, but about ensuring that supply lines remain operational; something which monetary policy is not made for. If anything, it’s a seller’s market.

That doesn’t seem to hold for markets though; where everything – except for the US dollar – once again appears to be on sale, with only few willing buyers.